Hong Kong property heirs have their future fortunes tied to common prosperity

Having arguably the world's least affordable housing market doesn't work in developers' favour today

Oct 26, 2021

NEARLY 90,000 people left Hong Kong year-on-year in June 2021, marking a 1.2 per cent decline in the territory's population according to government data.

Some left Hong Kong to take up the British government's offer of a route to citizenship, after China's legislature passed the Hong Kong National Security Law in mid-2020.

Businesses are fretting over the territory's strict travel restrictions amid its pursuit of a Covid-zero strategy.

Previously strong performing hotels and malls in Hong Kong have been hit by the drop in the number of visitors, in particular those from the key China market, amid the pandemic.

However, private home prices reached a record high recently. Tycoons, who derive much of their wealth from property, dominate the rankings of Forbes' Hong Kong's Richest 2021. Seven of the 10 richest have substantial interests in the property sector.

But the share prices of major Hong Kong property groups trade at hefty discounts to their book values. Singapore-listed Hongkong Land, which has a Central Hong Kong portfolio of some 4.8 million square feet of prime property, traded at a discount to its net asset value (NAV) as at Jun 30, 2021, of 65 per cent as at Oct 22, 2021.

Hong Kong-listed Sun Hung Kai Properties (SHKP), CK Asset Holdings, Henderson Land and Swire Properties, each of which has a NAV exceeding the end-2020 pro forma NAV of CapitaLand Investment, traded at between 0.4 to 0.5 times of end-Jun book value as at Oct 22, 2021.

Some groups have made efforts to boost share prices. Hongkong Land announced a move to invest up to US$500 million to buy back its shares on the evening of Sep 6. The group started buying back shares on Sep 7 and its share price closed 13 per cent higher that day.

Hong Kong-listed Shui On Land is proposing to spin off and separately list a portfolio of 13 completed investment properties in China as well as its property management and asset management businesses, so as to help unlock value of these assets.

Perhaps boards of the big Hong Kong groups can do more to realise value for shareholders. For example, sell the entire company at book value. Controlling shareholders can reinvest proceeds in property development sites and completed investment properties if they so desire.

Groups such as Hongkong Land, SHKP and Swire Properties have large high quality portfolios of investment properties worth US$29 billion, HK$396 billion (S$68.6 billion) and HK$266 billion as at end-Jun respectively. Such assets may be more efficiently held in real estate investment trusts and in the process, lucrative fund management businesses can be created.

Perhaps, strategic challenges keep the boards of the Hong Kong property giants busy. Going forward, the China market, which has provided profitable growth opportunities, may not be a rich source of opportunity.

Economic growth in China may slow amid weak population growth and a rapidly ageing population. Pace of construction of properties may ease as the Chinese economy becomes less dependent on real estate.

Regulations could crimp profit margins while the drive for more equal distribution of wealth could reduce demand for high-end property, which is a key focus area for the Hong Kong groups.

Amid China's rapid growth over the last few decades, large and sophisticated Chinese property players have emerged. The Hong Kong groups may struggle to find a competitive edge as they take on China peers, who possess resources, networks, track records, and local knowledge.

Perhaps though, the fortunes of the Hong Kong property groups will ride on what happens in their home market, especially the residential segment.

Excesses?

As an equities analyst covering Singapore property more than a decade ago, I struggled in selling the merits of Singapore developers versus Hong Kong developers.

The push-back from savvy investors was that Singapore has a successful public housing programme and hence a relatively small private home market. Also, the view was that the Singapore government, by being proactive in intervening in the private home market and in supplying adequate land across different property asset classes, limits profit potential of developers.

Today, both investors and Hong Kong developers may prefer it if Hong Kong had a more successful public housing market, a higher rate of home ownership and more affordable home prices. If the young found it easier to buy homes, social cohesion in the territory could be stronger and worries over people leaving Hong Kong would recede.

Property tycoons such as Li Ka-shing of CK Asset, Lee Shau Kee of Henderson Land and the late Cheng Yu Tung of New World Development built fortunes by being savvy in riding on Hong Kong's growth as a business and trading hub.

Hong Kong is being challenged as a financial centre by Shanghai and Singapore. Neighbours Guangzhou and Shenzhen are competing with Hong Kong as hubs for business, trade and innovation.

Hong Kong's economy is expected to grow strongly at over 6 per cent this year but worries persist over the long-term relevance of Hong Kong. Making homes more affordable could be critical for Hong Kong to succeed.

Hong Kong is often cited as having arguably the world's least affordable housing market where median property price is more than 20 times that of median annual household income.

In July, Adam Kwok, an executive director of SHKP and a grandson of Kwok Tak Seng, who founded the group, criticised local authorities for not doing as much as possible to procure land for housing development.

In her annual policy address earlier this month, Hong Kong's leader Carrie Lam unveiled plans to tackle the territory's housing shortage by building a new metropolis in northern Hong Kong, covering 300 square kilometres with, ultimately, up to 926,000 homes for some 2.5 million people.

But homes in the new metropolis in northern Hong Kong or on land reclamation in the eastern waters off Lantau Island will take some years to materialise.

Large Hong Kong property groups today have solid foundations to build on. The groups generally enjoy strong recurring income, possess good project execution capabilities, excel in place making and are often lowly geared. Some could improve the capital efficiency of their platforms.

Today, property heirs in their 30s and 40s, who are grandchildren of founders, such as Adam Kwok and Christopher Kwok at SHKP, Adrian Cheng and Sonia Cheng at New World Development, and Daryl Ng at Sino Group, hold key leadership roles.

Pressing challenge

A unique and pressing challenge for the heirs to property fortunes is not to exacerbate inequality but to help achieve common prosperity in Hong Kong.

Major Hong Kong property groups have expressed confidence in the territory's future. They need to work with the government of Hong Kong to improve the housing situation by ramping up supply expeditiously in order to retain young people who are willing to build a future in Hong Kong. This will likely be a prerequisite for the territory to be relevant and get its share of the spoils of development in the Greater Bay Area and beyond.

More good times await Hong Kong if it can make progress in achieving common prosperity. The clarion call to the property heirs is to help deliver this goal.